Market Commentary | July 20, 2022
I have often thought that markets function under similar operating principles to those of a Galileo thermometer. Individual floats (stocks) rise or fall relative to their specific density and the density of the surrounding liquid (markets) as temperature (economics) changes. Late last summer, with concerns about the pandemic, inflation, interest rates, and recession, as well as other factors, we were analyzing companies with respect to how resilient they would be in an evolving economic environment.
In August, VICI Properties (VICI) announced the $17.2B acquisition of MGM Growth Properties (MGP). With an enterprise value of $45B, the combined entity would become America’s largest owner of experiential real estate (casinos and resorts). The announcement went on to extoll all the benefits of the merger, including economies of scale, tenant diversification, and earnings accretion.
In September we had a chance to meet with VICI management to discuss the whole merger strategy in detail. The combined entity was expected to gain an investment grade credit rating (interest rates). The bigger VICI was expected to be added to the S&P 500, which would attract new billions in institutional investment. Though Las Vegas got pretty quiet in the early months of COVID (pandemic, recession), VICI received every dollar of rent from its iron-clad, escalating, long-term, triple net leases (inflation). They had all the right stuff (specific density), but the deal wasn’t so compelling until we realized we could get in at a 4-6% discount through the arbitraged purchase of the MGP shares and pocket a higher dividend yield while we waited for the merger to complete.
On April 29, our MGP converted to VICI. VICI got the forecast credit rating upgrade. And on May 31, VICI became the newest member of the S&P 500. For our participation, we realized gains ranging from 5 to 15% and while that might not qualify as an astounding success, it came during one of the worst stock and bond markets of the last 40 years. From 08/31/21 to 06/30/22, the MSCI US REIT Index (RMS), our benchmark, declined 12.43%; YTD 2022 the RMS is down almost 21%.
We have identified a number of new issues that we feel have the right specific density in our evolving environment. We will recycle our VICI proceeds into these new opportunities in anticipation of repeating the success.
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